The unbearable brightness of Apple’s services

Apple will announce that its services business achieved over $100 billion in annual revenues in the last year, according to the Financial Times. If true, this would be a major achievement.

Many might recall that eight years ago Apple CEO Tim Cook declared Apple’s intention to double the size of its services business by 2020, when he was aiming to raise $50 billion a year in the segment. “We feel great about this momentum, and our goal is to double the size of the services business in the next four years,” he said at that time. 

Apple’s hugely successful services pivot

It took just two years to get there, achieving near $46.3 billion in services revenue in 2019. That was double the income generated by the segment in 2016, when Apple reached $24.3 billion in services revenue. The services segment was the size of a Fortune 50 company by 2022, when it reached $75.1 billion — bigger than IBM. 

Today, Apple is expected to announce the segment has become bigger than Target or Walt Disney, achieving $108.6 billion in the year. With a wide range of consumer and business services to its name, Apple’s service income is second only to the iPhone in Apple’s overall revenue picture, making much larger margins (75%) than it generates through hardware sales alone (39.1%).

Earlier this year, Apple CFO Kevan Parekh confirmed the company has more than a billion paid subscriptions across services on its platforms.

For most of us, these statistics probably don’t mean much. We’d just like Siri to choose the correct track when we request it play something and enjoy the convenience of Apple Pay and the security and privacy baked inside every interaction at the App Store. Apple thinks different. 

For the company, the services business is a bulwark against bad times, enabling it to craft regular recurring incomes upon which to base its business while protecting it against overexposure to fluctuating hardware sales. Delivering services its customers like helps boost product engagement, cement brand loyalty, and deliver vital revenue.

There are wolves

Thing is, it’s a revenue stream that remains under threat, with regulators — particularly in Europe — attempting to force competition into segments of that market. The move to open up the App Store only really means that some of the millions generated at the store end up going to other corporations, not Apple.

Those efforts and steady attacks on Apple’s Google search income mean parts of the company’s $100 billion annual revenue will decline. Even so, analysts still expect services to make up more than 30% of Appe’s revenue by the end of the decade.

With that in mind, Apple will need to continue to identify and deliver new services. The diversification of services income gives it the ability to accommodate any specific changes that could impact some of those it now provides while protecting core income. One service that hasn’t yet been monetized is the “via Satellite” suite it offers through current satellite partner  GlobalStar.

Apple has hinted at plans to make access to these services a fee-based option since launch, but that hasn’t happened yet. With recent claims it is open to working with Elon Musk’s SpaceX on satellite provision, might an international satellite network become a new iCloud+ option for paid subscribers? Perhaps Apple also hopes to capitalize on the distribution it can provide to AI companies, seeking an AI deal that echoes the one it currently has in search with Google. (The latter allegedly contributes roughly $20 billion a year of its overall services income.)

Services as a service

The cloud surrounding this silver lining is that while services income can buoy Apple during economic storms, it is also highly vulnerable to long-term economic challenges.

With that in mind, it’s likely the performance of Apple’s services arm will be closely watched in the months ahead, particularly as the US government shutdown impacts millions.

There is a historical comparison to be made: Just as Apple’s retail store closures became a barometer for disease outbreaks during Covid, sudden reversals in its subscription revenue couldreveal where economic pressure is being most felt in future.

None of the dark clouds can tarnish the achievement, of course. In less than a decade, Apple’s leadership has created a $100 billion revenue stream effectively from scratch, delivering major benefit to the company and its shareholders while giving the rest of us Slow Horses, Foundation, and Black Bird. Most of us continue to look forward to Siri’s second season, too.

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